In a Senate Banking Committee hearing (webcast) on the annual report submitted by the Financial Stability Oversight Council, Sen. Richard Shelby, R-Ala., cited economic statistics from the report and noted “If the Council wanted to understand why unemployment is high and mortgage lending is constrained, an examination of Dodd-Frank would have been a good place to start. More fundamentally, the Council’s report overlooks the serious structural flaws in our regulatory system, which Dodd-Frank only made worse.” He added, “Unfortunately, Dodd-Frank … solidified the close relationships between regulators and big banks by maintaining their pre-existing prudential regulators. In contrast, the regulator for the smallest banks, the OTS, was abolished. It also protected the big banks from bankruptcy by creating a new resolution mechanism to ensure that large institutions do not fail.” Shelby further stated, “To add insult to injury, the very same regulators that missed the warning signs were then closely consulted on how to draft Dodd-Frank. In fact, staff from the very same agencies that failed us were detailed to Congress to help write the bill. This is the type of thing that outrages the American people, but is sadly business as usual in Washington.” He concluded, “Secretary Geithner is no stranger to bank bailouts or bank regulation. He has played a key role in financial regulation for the past two decades. However, recent news reports about his handling of alleged LIBOR manipulations suggest that he, too, may have tempered his response to what can be characterized as a significant problem within the banking industry.”

Geithner’s written testimony reviewed the conclusions and recommendations made by the Council in its second annual report. He noted that the ongoing European crisis presents the biggest risk to our economy; and that U.S. financial institutions have significantly reduced their exposure to the most vulnerable economies of Europe, and they hold substantial levels of capital against the remaining exposures. His testimony also highlighted the progress made in implementing financial reform and provided recommendations to improve financial stability. He concluded that “We still have a lot of work ahead of us, however. We need your support to make these rules strong and effective. And we need your support to make sure the enforcement agencies have the resources they need to prevent fraud, manipulation, and abuse.”

During the hearing, Sen. Pat Toomey, R-Pa., questioned Geithner about LIBOR and asked “did you or any of the other regulators you are aware of ever actually condone or encourage misreporting of LIBOR?” The senator also aked Geithner “Why did you not use the enormous influence that you have had, both at the Fed and at Treasury, to persuade the financial institutions to adopt a different mechanism that would not be subject to this kind of manipulation when there are other alternatives available?”

Prior to the hearing, Sen. Sherrod Brown, D-Ohio, called on Geithner to step up oversight activities and hold Wall Street megabanks liable for risky bets. In a letter to Geithner, Brown pointed to Barclay’s failure to properly oversee the LIBOR reporting process, as well as massive trading losses by U.S. banks as reasons why the Treasury Department should increase its oversight of trillion-dollar Wall Street institutions. “With example after example of Wall Street fraud and abuse, it’s clear that the public has lost faith in the financial system,” Brown said. “Wall Street’s behavior shows what more and more financial experts are beginning to acknowledge – these trillion-dollar megabanks are too big to manage and too big to regulate.”